Massachusetts First State in the Nation to Pursue 'Pay for Success' Social Innovation Contracts - January 19, 2012

Commonwealth to seek performance-based investments to spur innovative solutions to social issues, achieve better outcomes and save money

BOSTON -- Wednesday, January 18, 2012 -- The Patrick-Murray Administration today announced a first in the nation initiative to allow Massachusetts to enter into "pay for success" contracts designed to encourage innovative solutions to social problems, improve the performance of government and save taxpayer money. The Executive Office for Administration and Finance (ANF) today issued Requests for Response (RFRs) as a next step in pursuing these social innovation financing contracts.

“Social innovation financing is a tool that helps us tackle long term social issues with innovative methods,” said Governor Deval Patrick. “These initiatives will help us change the delivery of state services to save money and improve program performance.”

Massachusetts is the first state in the nation to take formal steps to establish a comprehensive social innovation financing program that is focused on pay-for-success contracts. Funding for the Commonwealth’s program would be paid from budgetary resources, but only if the programs work to deliver better social outcomes and savings to the state budget. President Obama’s FY 2012 budget included a proposal to invest $100 million in “pay for success” projects in seven pilot areas including job training, education, juvenile justice and care of children with disabilities. Through this initiative, the Commonwealth expects to be well-positioned to compete for any federal funding that may be available in the future. 

“Social innovation financing is one of the tools we are pursuing to accelerate system-wide improvements in government performance,” said Secretary of Administration and Finance Jay Gonzalez. “It’s a creative idea based on a simple premise - have government pay for demonstrated success rather than the promise of success.”

Performance-based investments will help encourage innovation and tackle challenging social issues. New and innovative programs have potential for success, but often have trouble securing government funding because it can be hard to rigorously prove their effectiveness. Social innovation financing allows the government to partner with innovative service providers and, if necessary, private foundations or other investors willing to cover the upfront costs and assume performance risk, to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes.

Initially, the Patrick-Murray Administration plans to explore the use of social innovation financing to tackle two challenging issues:

• Chronic Homelessness – The Administration seeks to partner with social entrepreneurs to provide stable housing for several hundred chronically homeless individuals. The goal of the initiative will be to improve the well-being of the individuals while simultaneously reducing housing and Medicaid costs.

• Juvenile Justice – The Administration seeks to partner with social entrepreneurs to support youth aging out of the juvenile corrections and probation systems so as to assist them in making successful transitions to adulthood. The juvenile justice contract will be designed with the specific goal of reducing recidivism and improving education and employment outcomes over a six-year period for a significant segment of the more than 750 youth who exit the juvenile corrections and probation systems annually. 

The Administration may expand these initiatives to additional policy domains in the future. 

Through the RFRs being issued today, the Patrick-Murray Administration will explore a number of options for social innovation financing, including:

• Pay-for-success contracts – agreements which will allow the state to pay service providers after they have demonstrated success, rather than the current process of paying for the promise of success. These contracts will target innovative social service programs in domains where sophisticated, multi-year performance measurement is possible.

• Social impact bonds – financing arrangements where third party intermediaries and investors give service providers, typically non-profits, upfront funding and other expertise to allow them to enter into pay-for-success contracts with the government. For example, the United Kingdom is piloting a social impact bond program to reduce criminal recidivism.

For information on social innovation bonds or pay-for-success contracts please contact Abby Dosoretz at ANF at (617) 727-2040 x 35-402 or email social.innovation@state.ma.us